Interest rates: Borrowers, savers and investors (retirees)
- Posted by Palladium Wealth Partners
- On September 12, 2019
- 0 Comments
In September, the Reserve Bank of Australia (RBA) Board decided to leave the cash rate unchanged at the historic low of 1.0%. A key excerpt from the statement by The RBA Governor, Philip Lowe, on the recent monetary policy decision is provided below.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments, including in the labour market, and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
Interestingly, from a historical perspective, from 1990 to 2019, the cash rate has been as high as 17.5% and as low as 1.0%. However, the average over this timeframe has been roughly 5.1%.
Monetary policy, cash rates and interest rates
General overview
Given the current environment, the relationship between monetary policy, cash rates and interest rates, and what it means for borrowers, savers and investors (retirees), is a much-discussed topic.
If you are unfamiliar with this relationship and what it means for these groups, watch our animation, ‘Monetary policy, cash rates and interest rates’, as it provides an introductory overview.
In broad terms, a change to the cash rate influences other interest rates in the economy, affecting the behaviour of borrowers and lenders, economic activity, and ultimately the rate of inflation. For example:
- If inflation is on the rise, the RBA Board may decide to raise the cash rate with the view to slowing growth and keeping inflation in check. Financial institutions often follow suit. The impact of increasing interest rates (lending, deposit and investment rates), can force consumers and businesses to borrow less and save more. This slows down economic activity.
- On the other hand, to stimulate the economy, the RBA Board may lower the cash rate. Financial institutions often follow suit. The impact of decreasing interest rates (lending, deposit and investment rates), can encourage consumers and businesses to borrow more and save less. This helps the economy to grow through a boost to retail and capital spending.
It’s important to note that financial institutions, and the interest rates that they charge (lending rates) and pay (deposit and investment rates), don’t necessarily move in lock-step with the cash rate.
Factors, such as risk and profit margins, can see different interest rate pricing applied in times of both cash rate movement (e.g. not passing on a cash rate cut in full) and non-movement.
Cash rates and lending rates
The lending rates charged on loans by financial institutions to consumers and businesses, generally follow the direction of cash rate movement.
The below table serves to highlight this relationship by displaying a 2-year timeframe (July 2008 to July 2010), where considerable cash rate movement occurred. Recent data (August 2019) is also displayed.
|
The Relationship Between Cash Rates and Lending Rates |
|||||||
| Time
(Selected Months) |
Cash Rate | A Selection of Examples of Lending Rates Offered*# | |||||
| Small business; Variable; Residential-secured; Term | Small business; 3-year fixed | Housing loans; Banks; Variable; Standard; Owner-occupier | Housing loans; Banks; 3-year fixed; Owner-occupier | Personal loans; Credit cards; Standard
|
Personal loans; Margin loans | ||
| Jul-2008 | 7.25% | 10.10% | 9.70% | 9.62% | 9.42% | 19.66% | 10.55% |
| Aug-2008 | 7.25% | 10.10% | 9.04% | 9.62% | 8.89% | 19.92% | 10.58% |
| Sep-2008 | 7.00% | 9.97% | 8.87% | 9.36% | 8.48% | 19.92% | 10.49% |
| Oct-2008 | 6.00% | 9.41% | 7.85% | 8.34% | 7.29% | 19.75% | 10.02% |
| Nov- 2008 | 5.25% | 9.21% | 7.04% | 7.73% | 6.91% | 19.35% | 9.71% |
| Dec-2008 | 4.25% | 8.35% | 6.79% | 6.84% | 6.25% | 18.95% | 9.10% |
| Feb-2009 | 3.25% | 7.28% | 6.50% | 5.84% | 5.67% | 18.03% | 8.38% |
| Mar-2009 | 3.25% | 7.22% | 6.64% | 5.84% | 5.59% | 18.03% | 8.05% |
| Apr-2009 | 3.00% | 7.08% | 6.90% | 5.76% | 5.87% | 17.96% | 8.02% |
| May-2009 | 3.00% | 7.08% | 7.21% | 5.76% | 6.06% | 17.96% | 8.02% |
| Jun-2009 | 3.00% | 7.11% | 7.69% | 5.78% | 6.52% | 17.96% | 8.02% |
| Jul-2009 | 3.00% | 7.11% | 7.80% | 5.78% | 6.52% | 17.96% | 8.01% |
| Aug-2009 | 3.00% | 7.11% | 8.08% | 5.78% | 7.01% | 17.96% | 8.01% |
| Sep-2009 | 3.00% | 7.11% | 8.15% | 5.78% | 7.14% | 17.96% | 8.01% |
| Oct-2009 | 3.00% | 7.36% | 8.69% | 6.03% | 7.62% | 18.17% | 8.16% |
| Nov-2009 | 3.25% | 7.55% | 8.48% | 6.28% | 7.62% | 18.52% | 8.46% |
| Dec-2009 | 3.50% | 7.84% | 8.39% | 6.64% | 7.62% | 18.70% | 8.67% |
| Feb-2010 | 3.75% | 7.84% | 8.30% | 6.64% | 7.70% | 18.77% | 8.71% |
| Mar-2010 | 4.00% | 8.09% | 8.56% | 6.89% | 7.73% | 19.02% | 8.91% |
| Apr-2010 | 4.25% | 8.34% | 8.60% | 7.14% | 7.78% | 19.27% | 9.17% |
| May-2010 | 4.50% | 8.59% | 8.32% | 7.39% | 7.77% | 19.52% | 9.39% |
| Jun-2010 | 4.50% | 8.59% | 8.24% | 7.39% | 7.54% | 19.52% | 9.42% |
| Jul-2010 | 4.50% | 8.59% | 8.18% | 7.39% | 7.48% | 19.52% | 9.42% |
| Aug-2019 | 1.00% | 6.20% | 4.36% | 4.94% | 3.41% | 19.94% | 7.08% |
*An average of the major financial institutions’ lending rates offered.
#RBA. (2019). Interest rates: Lending rates. Statistical tables.
Importantly, when considering housing loans for example, this has implications for not only those of us that are paying off a loan, but also for those of us that are looking at applying for a loan.
With this in mind, depending on your personal circumstances, you may find the following of interest:
- Loan repayment calculator.
- Loan splitting calculator.
- Loan switching calculator.
- Borrowing power calculator.
Cash rates and retail deposit and investment rates
The deposit and investments rates paid on savings accounts and term deposits by financial institutions to consumers and businesses, generally follow the direction of cash rate movement.
The below table serves to highlight this relationship by displaying a 2-year timeframe (July 2008 to July 2010), where considerable cash rate movement occurred. Recent data (August 2019) is also displayed.
|
The Relationship Between Cash Rates and Deposit and Investment Rates |
|||||||
| Time
(Selected Months) |
Cash Rate | A Selection of Examples of Retail Deposit and Investment Rates Offered*# | |||||
| Savings accounts; Banks’ bonus savings accounts; $10,000^ | Savings accounts; Online Savings Accounts; $10,000 | Banks’ term deposits ($10,000); 3 months | Banks’ term deposits ($10,000); 6 months | Banks’ term deposits ($10,000); 1 year | Banks’ term deposits ($10,000); 3 years | ||
| Jul-2008 | 7.25% | 5.50% | 7.30% | 4.90% | 6.40% | 8.25% | 4.95% |
| Aug-2008 | 7.25% | 5.50% | 7.30% | 6.00% | 7.50% | 7.25% | 5.05% |
| Sep-2008 | 7.00% | 5.45% | 7.20% | 5.80% | 5.75% | 7.00% | 6.10% |
| Oct-2008 | 6.00% | 4.60% | 6.35% | 5.35% | 4.10% | 5.15% | 5.00% |
| Nov- 2008 | 5.25% | 4.00% | 5.60% | 4.25% | 3.75% | 3.65% | 4.05% |
| Dec-2008 | 4.25% | 3.20% | 4.60% | 3.85% | 3.50% | 3.75% | 3.95% |
| Feb-2009 | 3.25% | 2.30% | 3.40% | 3.50% | 2.65% | 3.40% | 3.40% |
| Mar-2009 | 3.25% | 2.30% | 3.40% | 2.45% | 2.25% | 3.00% | 4.05% |
| Apr-2009 | 3.00% | 2.15% | 3.15% | 2.45% | 2.00% | 3.05% | 4.45% |
| May-2009 | 3.00% | 2.15% | 3.20% | 2.25% | 2.70% | 3.25% | 4.90% |
| Jun-2009 | 3.00% | 2.15% | 3.20% | 2.10% | 3.20% | 3.55% | 5.30% |
| Jul-2009 | 3.00% | 2.15% | 3.20% | 2.60% | 3.20% | 3.70% | 5.40% |
| Aug-2009 | 3.00% | 2.15% | 3.20% | 2.60% | 3.35% | 4.50% | 5.80% |
| Sep-2009 | 3.00% | 2.15% | 3.30% | 2.60% | 3.35% | 4.55% | 5.80% |
| Oct-2009 | 3.00% | 2.40% | 3.35% | 3.00% | 3.30% | 5.30% | 6.20% |
| Nov-2009 | 3.25% | 2.65% | 3.55% | 2.65% | 3.60% | 5.40% | 6.80% |
| Dec-2009 | 3.50% | 2.95% | 3.85% | 3.65% | 4.35% | 6.00% | 7.00% |
| Feb-2010 | 3.75% | 2.95% | 4.05% | 2.85% | 3.15% | 5.95% | 7.00% |
| Mar-2010 | 4.00% | 3.40% | 4.05% | 3.30% | 3.45% | 6.00% | 6.60% |
| Apr-2010 | 4.25% | 3.60% | 4.25% | 3.45% | 3.55% | 6.00% | 6.60% |
| May-2010 | 4.50% | 3.80% | 4.50% | 3.45% | 3.55% | 6.00% | 6.50% |
| Jun-2010 | 4.50% | 3.80% | 4.50% | 3.75% | 4.40% | 6.00% | 6.50% |
| Jul-2010 | 4.50% | 4.35% | 4.50% | 3.80% | 4.05% | 6.00% | 6.50% |
| Aug-2019 | 1.00% | 1.75% | 0.45% | 1.45% | 1.35% | 1.45% | 1.50% |
*An average of the major financial institutions’ deposit and investment rates offered.
^Deposit accounts that pay a higher rate of interest if at least one deposit and no withdrawals are made each month.
#RBA. (2019). Interest rates: Retail deposit and investment rates. Statistical tables.
Importantly, when considering savings accounts and term deposits, this has implications for not only those of us that are saving, but also for those of us that are generating income to fund our (retirement) lifestyle.
With this in mind, depending on your personal circumstances, you may find the following of interest:
- Savings calculator.
- Savings goal calculators i.e.
- Term deposit calculator.
Moving forward
Although the above may be a lot to digest, it’s important to understand the relationship between monetary policy, cash rates and interest rates, and what it means for borrowers, savers and investors (retirees).
By keeping abreast of changes to the cash rate (and its influence on other interest rates in the economy), you can continue to make informed personal finance decisions now and for the future.
If you have any questions regarding this article, please do not hesitate to contact us.
